When the Unexpected Happens, Will You Have Enough Cash?

Most people realize that they should put aside enough cash to protect themselves against an emergency or a sudden loss of income.  If the unexpected happens and an adequate cash reserve is not readily available, you may be forced to sell investments or real estate for less than they might be worth at another time under less pressing circumstances.

That’s why it’s wise to plan your emergency cash needs carefully.  Here’s how to go about it.

How Much Cash is Enough

Step 1:  Estimate your living expenses.  It’s fairly simple to estimate your annual living expenses, but be careful not to forget anything.  Rent or mortgage payments, food, clothing, car maintenance, utilities, and monthly debt payments are seldom overlooked, but people tend to forget insurance premiums (car, life, medical, homeowner’s, etc.)  and payments which are made quarterly or semi-annually.

To determine how long your cash reserves should last, a good rule-of-thumb is to set aside enough cash to pay your expenses for six months if your household has only one wage-earner.  If your household has two wage-earners, a three month cash reserve is adequate in most cases.

Modify these time periods by considering how long it might take you to find new employment if you lost your present job, and how long it would take your disability insurance to take effect if you couldn’t work because of illness or injury.

When you calculate how much cash you’ll need, don’t count on certain kinds of income to provide that cash.  For example, you might be tempted to include anticipated dividends from equity investments as part of your cash reserves. That’s a mistake because income from stocks is not guaranteed.

Step 2:  Establish your inner comfort level.  Everyone is different and you should consider whether you’ll really feel secure that your cash reserve is adequate.  If you’re uncomfortable about only having enough money to meet expenses, then put aside a specific amount beyond and above those expenses.

Keep in mind that your needs will vary depending on your circumstances.  For example:

  • If there’s a new baby in your family, you should increase your emergency cash level.
  • If you are young, single, and without debt, you may not need to maintain a high level of cash – particularly if you have skills that make you easily employable.
  • If you are about to retire, chances are that you’ll feel insecure in what will be an entirely new way of life.  A cash reserve that’s well above regular expenses may be called for, at least until you feel comfortable about living as a retiree.
  • If you’ve started a new business, don’t count on it to produce immediate personal income.  Instead, increase your emergency cash until you’re certain that the business will generate a steady income.  In some cases, this can take a few years.

 

Put Your Cash in the Right Place
Security and liquidity are the major criteria for where to keep your cash reserves.  Put your money where it will be readily available to you when you need it.  The two most common choices are:

  • A savings account.  You’ll earn a low interest rate, but if you’re very conservative you’ll know your money is completely safe.
  • A money market fund.  Bank money market funds are federally insured, but other money market funds earn a higher interest rate and are usually quite safe.  Look for funds that have check-writing or telephone withdrawal privileges.

 

Wherever you put your emergency cash, make sure it earns compound interest.  It’s possible that you may never have to use your cash reserves and over a period of time, the power of compound interest can build a tidy nest egg for you.

Five Facts about Unemployment Benefits

Five Facts about Unemployment Benefits

If you lose your job or your employer lays you off, you may be able to get unemployment benefits. The payments may be a welcomed relief. But you should know that they’re taxable.

Here are five important facts from the IRS about unemployment compensation:

1. You must include all unemployment compensation in your income for the year. You should receive a Form 1099-G, Certain Government Payments. It will show the amount paid to you and the amount of any federal income taxes withheld.

2. There are several types of unemployment compensation. They generally include any amount received under an unemployment compensation law of the U.S. or a state. For more about the various types, see Publication 525, Taxable and Nontaxable Income.

3. You must include benefits paid to you from regular union dues in your income. Different rules may apply if you contribute to a special union fund and those contributions are not deductible. In that case, only include as income any amount you get that is more than the contributions you made.

4. You can choose to have federal income tax withheld from your unemployment. You make this choice using Form W-4V, Voluntary Withholding Request. If you do not choose to have tax withheld, you may have to make estimated tax payments during the year.

5. If you are facing financial difficulties, you should visit IRS.gov. “What Ifs” for Struggling Taxpayers explains the tax effect of events such as the loss of a job. For example, if your income decreased, you may be eligible for some tax credits, such as the Earned Income Tax Credit. If you owe federal taxes and can’t pay your bill, contact the IRS as soon as possible. In many cases, the IRS can take steps to help ease your financial burden.

IRS Tips about Taxable and Nontaxable Income

IRS Tips about Taxable and Nontaxable Income

Are you looking for a hard and fast rule about what income is taxable and what income is not taxable? The fact is that all income is taxable unless the law specifically excludes it.

Taxable income includes money you receive, such as wages and tips. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.

Some types of income are not taxable except under certain conditions, including:

  • Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
  • Income from a qualified scholarship is normally not taxable. This means that amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts you use for room and board are taxable.
  • If you got a state or local income tax refund, the amount may be taxable. You should have received a 2013 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency may have provided the form electronically. Contact them to find out how to get the form. Report any taxable refund you got even if you did not receive Form 1099-G.

Here are some types of income that are usually not taxable:

  • Gifts and inheritances
  • Child support payments
  • Welfare benefits
  • Damage awards for physical injury or sickness
  • Cash rebates from a dealer or manufacturer for an item you buy
  • Reimbursements for qualified adoption expenses

For more on this topic see Publication 525, Taxable and Nontaxable Income. You can get it at IRS.gov or call to have it mailed at 800-TAX-FORM (800-829-3676).